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Dow Theory is based on the analysis of the early history rates of the New York Stock Exchange, where it has been already noticed a clear trend towards the simultaneous increase or decrease in the vast majority of the shares. It was noted that most of the courses is bound to the general public in the overall market trend.

Dow theory is based on the assumption that changes in quoted shares are most consistent with the general trends in the stock market. During the bull market, prices of the most shares are increasing, but when there is a bear market – shares mostly lose their values and it is a signal – signal to sell or to buy.

Dow distinguished several types of trends because of their duration:
- Primary trend (base) – usually takes several years;
- Major trend, also known as the primary or long-term trend – takes at least a year or more years (on average 2 to 4 years);
- Secondary trend, also known as medium-term trend – it usually lasts from one to several months.  Secondary trends are subordinated to the original trend;
- Minor trend, also called tertiary or short-term trend – it takes several days to several weeks and it is the part of secondary trend. And in short term it can be signal to buy or to sell.

Dow took a further analysis of the relationship between the trend of the market volume and the trend level of quotation indexes. The Dow theory states that during the bull maket the growth of rates is accompanied by increasing the trading volume and price reductions decreases the volume. In the interim of technical correction, despite the depreciation of prices, a simultaneous decrease in volume is a clear predictor of the overall rising trend, which will soon have the chance to go from the “shadow zone” to light.


Analogicly – in the bear market – there is an inverse relationship. During the main recede trend, we have to deal with the increase, which is accompanied by decreases in quotes. By contrast, sales volume decreases when listing the technical correction grow to the top. According to Dow it is a symptom of a general bear market, because the observed increase in the priceusually turns out to be very volatile.


Dow Theory was mainly first used to identify the trends of the market crisis on the American Stock Exchange NYSE. Dow used the stock exchange indexes (DJIA and the DJTA).


Dow Theory has no practical applications for determining the point of buying or selling currency pairs on the Forex market. However, this theory makes sense, because the knowledge of the main assumptions of this theory enables us to understand the other well-known theories and systems to determine the turning points in courses such as Elliott wave theory, or simply then it will be easier to learn the trend analysis, analysis of the formation and help to determine entry and exit points to the forex market.

According to the Dow – the end of bull market is also beginning of a bear market and a major downward trend is divided, like the bull market, also in three phases. The first period is known as distribution phase. This is the final phase of speculation of the smaller investors. Long-term investors begin to sell a choosen currency, whose exchange rate is highly inflated. Demand is gradually decreasing, and supply is increasing.


This all means that the panic on the market started as the next phase of the bear market. The largest investors have already sold their shares, and yet do not intend to re-enter to the market. A major demand from their part dies, and small investors are starting to get rid of the currency. Demand, however, does not allow them to achieve their original goals, so the discount rate becomes accelerated. Sometimes at this stage beginsa panic with sales at every, even very low, price.


After the panic phase there is often short-lived boom. But this is not the end of bear market, rather the pause between second and third wave of the bear market. Investors saw the weakness of grow withdraw their funds from the market by agreeing to only a slightly reduced losses compared to the bottom of the listing phase during panic.


In the third stage of the bear market, the main source of supply are those who purchased a choosen currency at a temporary boom, hoping that the boom is coming here again. Exchange rate begins to decrease again. Rate decreases, until finally all the bad news will be discounted. Then again can start a new boom. Cycle of a stock according to Dow closes at this point.

Let’s think if the Dow theory aplies to the Forex market where people trade money instead of the stock shares.


The main assumptions of Dow Theory are universal for all markets, where there is a meeting of supply and demand and where the odds of exchanged shares, commodities or currencies will affect the psychological orientation of individual market participants. So regarding the forex market in the light of the Dow theory we can find three phases defined by Dow.


The first stage is defined as the accumulation. At a time when the former takes the fall of the currency, it moves slowly into the hands of “tough guys”. Forward-looking investors watching the economic crisis causing the weakening of the currency exchange rate find that in this matter it can be only better. Usually after the crisis there are coming a better times and as a result of improving the fundamental phenomena for a country – the currency exchange rate can begin to grow. In the top of depression and hopelessness, they proceed to buying at the lowest prices. As a result of their work the rate stops in place.


The next phase of the bull market is a consistent increase in prices. Usually, however, it is still calm and balanced. Indeed, potential investors become convinced to enter the market. In the economy of the country there is more information that promotes growth of the currency.


Last stage is called bullish phase of activity of smaller investors. In fact the small investors begin to speculate on a wider scale with less knowledge about the market. Mood of gold fever comes and demand is growing dramatically.